Post-Election Wrap-Up: What’s Next for Defense Spending?
November 5, 2014
On November 4, the Republicans expanded their majority in the House of Representatives and took the Senate, winning at least a 52-48 majority. What does this mean for the defense budget in the near term? What are the important decision points over the next six months that are critical for defense? What are the broader concerns to pay attention to in the medium term?
With the midterm elections passed, the 113th Congress returns to conclude with a lame duck session starting on November 12. Since Congress recessed on September 19, the United States conducted its first air strikes in Syria, U.S. and Afghan officials signed a bilateral security agreement, and Ebola reached the United States. With this security environment as the backdrop, the next six months harbor significant budget events that will need to be tackled by both the outgoing and incoming congresses. Figure 1 provides a calendar of these events, from the most pressing (funding the government past December 11) to the most important indicator for the long-term (2016 Senate budget resolution).
Figure 1: Calendar of FY 2015 and FY 2016 Budget Process
There are three core budgetary obstacles for the Department of Defense (DoD) that must be cleared in the next six months: avoiding government shutdown by passing a spending bill, funding ongoing overseas DoD operations, and providing a funding baseline for FY 2016. Then, beyond these three unavoidable requirements are three additional hurdles that will play a role in the defense budget debate: passage of a defense policy bill for 2015, authorizing use of force in Iraq and Syria, and congress setting their baseline FY 2016 spending.
Imperative 1: Defense Funding (a.k.a. Avoiding a Shutdown)
The single most important item for the Department of Defense (DoD) is getting its funding for the year. Right now, DoD is operating under a Continuing Resolution, which extends to December 11, at which point the government will require a new funding vehicle. Step one of clearing all of these hurdles will be simply avoiding a shutdown. The two paths to avoiding a shutdown are to either pass another continuing resolution (CR) or to pass an appropriations bill. The flow chart in Figure 2 shows the different possible outcomes and requisite actions involved in each of the possibilities evaluated below.
Figure 2: The remaining questions and outcomes for the FY 2015 Budget
Passing another continuing resolution would be in keeping with recent experience, as DoD has averaged three CRs per year since the drawdown started in 2010, with an average of 130 days operating under CR in each of those years. One possible driver of a CR would be if Republicans believe that it behooves them to wait until both chambers have become Republican once the new Congress convenes in January before voting on appropriations. This would suggest a CR that extends to March, giving the new Congress time to prepare an appropriations bill.
In contrast, Republicans could desire to get appropriations for 2015 off the table in order to clear the decks for the new session to allow the Republican majority to focus on their agenda. This calculus would lead to either extending the CR for the full year, forgoing appropriations altogether, or passing an omnibus appropriations bill. A CR is more manageable and palatable in 2015 than in most years, because the base budget level for 2014 (which is what the CR is baselined from) is nearly identical to the planned level for 2015. The problem is that a CR has negative effects inside the DoD budget that would make executing in 2015 difficult.
Continuing Resolutions set the funding level for each appropriation account at the levels of the previous year. While the topline defense budget is likely to be the same whether under CR or new appropriations, the President’s budget request and appropriations bills move a lot of money between accounts to account for changes in priorities and resourcing requirements for 2015. For example, DoD has shifted significant money into Operation and Maintenance (O&M) accounts in the budget request to recover some of the readiness shortfalls lost over the past two years. In addition, continuing resolutions prevent starting new programs and restrict increasing production levels, constraining DoD’s ability to execute procurement plans. They also compress the budgeting time horizon for executing FY15 and hamstring the planning for FY16, because investment and force structure decisions made in the current year have ripple effects through the five-year Future Years Defense Program (FYDP) that have to be accounted for.
The 2015 budget level for defense is the least controversial since the Budget Control Act of 2011 initiated budget caps and sequestration. The Bipartisan Budget Act (BBA) of 2013 provided limited relief from the full sequester-level of spending in both 2014 and 2015 by setting a new budget cap for defense and non-defense discretionary spending in those two years. The president’s budget request, House budget resolution and Senate budget allocations all align (within a fraction of a percent) with the BBA-dictated topline budget for DoD.
Some contentions remain, including the fate of the A-10, which was maintained by both authorizations but cut in the house appropriations bill, as well as the refueling of the aircraft carrier, the laying up of cruisers, army aircraft reorganization, among others. These issues are one reason that could lead to a full-year CR, as opposed to appropriations, so Congress does not have to vote on any of them.
If the lame duck does succeed in taking up appropriations, they are likely to be taken up as an omnibus, including all (or nearly all) of the appropriations for the entire government, in order to better ensure passage. As mentioned above, unlike the last four years, the topline for defense has largely been determined already. While Congress could appropriate above the budget caps, this would also require a vote to amend or repeal the caps to avoid those appropriations getting “sequestered,” or cut across the board in order to match the cap level. Therefore, any appropriations are almost certain to be at the BCA cap level of $496 billion in the base budget.
Imperative 2: Funding Ongoing Operations
Beyond appropriating for the base defense budget, the Department of Defense also requires appropriations for Overseas Contingency Operations (OCO) – the funding that pays for the ongoing operations in Afghanistan, against ISIS in Iraq and Syria, and other counterterrorism efforts. Under the Continuing Resolution, there is plenty of funding to keep operations going, since, by continuing last year’s funding levels, it keeps OCO funding at $85 billion for defense, $27 billion higher than the administration requested.
There are three possible outcomes for OCO funding going forward. First, congress could simply appropriate to the requested level of $59 billion, plus or minus any changes reflecting skepticism over the requested $4 billion Counterterrorism Partnerships Fund. The second option would also be to appropriate OCO in the normal process along with omnibus appropriations, but to appropriate higher than the requested level. There are two pressures that could push the OCO amount up. First, the requested OCO funding of $59 billion originated before the rise of the ISIS and Ebola, two crises driving increased emergency funding. The campaign against ISIS is now estimated by the Pentagon at $8.3 million per day, and the head of U.S. Africa Command has estimated the six-month cost of DoD’s Ebola response at $750 million. Combined, these requirements would cost $4-5 billion over the year at current operational tempo. In addition, the overall pressure on the topline budget due to spending caps encourages migration of costs into the OCO accounts. Depending on signaling from the President and the strength of defense hawks in Congress, the OCO appropriation could rise into the $70-80 billion range, or even remain at the CR level of $85 billion with a full-year CR.
The third option for OCO is to be appropriated in outside of, and in advance of, the broader appropriations process. With the prominence of the challenges being posed by ISIS and Ebola, the President could propose an emergency supplemental appropriations bill that goes beyond just DoD, and addresses the outstanding funding questions for both of these issues, to include an adjusted OCO request for DoD along with additional funding for things like the Centers for Disease Control and National Institutes of Health.
Imperative 3: The FY 2016 Defense Budget
Once shutdown is avoided via either FY 2015 omnibus appropriations or a longer term CR, and overseas operations are funded, the next big hurdle is the FY 2016 president’s budget and its associated five-year Future Years Defense Program (FYDP). The broad congressional consensus that on FY 2015 may not exist in FY 2016. The Bipartisan Budget Act compromise ends in FY 2015 and full sequester-level caps return to force in FY 2016. As shown in Figure 2, the President’s budget for 2015 (in blue) repudiated the BCA caps (in red) for 2016-2019, stating that sequester-levels of funding “would leave our military unbalanced and eventually too small to meet the needs of our strategy fully.” In sum, the FYDP for 2016-2019 was $115 billion above the BCA cap level, with FY 2016 having the most significant gap ($35 billion). In addition, the graph includes an illustrative OCO increase for ISIS and Ebola response (shaded green area) above the current OCO placeholder level (green line).
Figure 3: The Defense Budget, 2012-2020
It is in this budget environment, along with the increasing requirements for ongoing operations abroad, that the president will be submitting his budget request to congress – the final budget that will be both built and executed by the Obama administration and their last chance to assert the defense priorities being espoused by the administration. To this end, it is highly likely that the president will request a defense budget above the BCA caps for 2016.
The president is not alone in wanting to repeal or amend the budget caps. You would be hard pressed to find a member of congress who wants to keep sequester as the law of the land. The challenge is of course how to pay for that increase. It is difficult to imagine the first act of a newly Republican congress to be either to increase discretionary spending or increase taxes. Republicans would likely seek to pay for it through non-defense domestic discretionary spending cuts (as seen in the FY 2013 Paul Ryan budget) or through entitlement reform. Democrats in the Senate are likely to demand a matching increase in non-defense domestic discretionary spending to match any increase in defense to prevent de-coupling the two, or through closing tax loopholes and may not support entitlement reform just to pay for defense.
Optional Item 1: 2015 National Defense Authorization Act (NDAA)
The NDAA is Congress’ primary opportunity to set funding levels and direct defense policy for the year. This allows them to set resource priorities (and constraints) for DoD. The House passed its version of the NDAA and the Senate has not, planning to work the committee version in conference with the House to come up with a bill that everyone can vote on. The NDAA is the most consistently passed bill, having been passed for the last 52 years. It is hard to imagine in a year with two outgoing chairmen of the committees of armed services (Sen. Carl Levin and Rep. Howard “Buck” McKeon), that they would allow this trend to be broken. The committee staffs have already been directed to work on a pre-negotiated conference report.
The conference report will have to de-conflict the two different approaches taken by the two committees. The Senate accepted a number of the administration’s cost saving proposals, including army aviation restructuring, laying up cruisers, and limiting pay raises, which were rejected by the House. Other items remain to be solved in appropriations, including the retirement of the A-10 aircraft. A number of policy issues could arise on the NDAA, threatening the ability to pass the bill, including the authorization for the use of military force (AUMF).
Optional Item 2: Congressional Budget Resolutions for FY 2016
Once the President presents his budget to Congress, they will then craft their own budget resolutions to set overall funding levels. If the earlier hurdles already discussed in this piece pass by without major problems, the budgets that come out of the respective budget committees could be very instructive in the direction that the budget debate will take going forward. The first question will be whether the House sets the budget at the BCA caps. The budget committee will have a new chairman, but it is likely that their budget will look similar to the Paul Ryan budget in 2013, which kept the topline of discretionary spending at the cap level, but cut non-defense domestic discretionary significantly in order to plus-up defense. The big question is what the Senate will do and when. Even with a Republican majority, the Senate does not likely have enough votes to de-couple the defense and non-defense portions of discretionary spending, which could require an amendment to the BCA.
Beyond these immediate budget issues are any number of ongoing and upcoming issues that CSIS will cover going forward, including the AUMF, the debt ceiling, the military compensation commission report release, among many others. But, the final question for these six months is how much can get done before the dynamics of the 2016 presidential election take over?